Tuesday, October 30, 2012

Taxation of Perquisites in India

If there are any benefits in addition to your salary that you obtain from your employer and if you are worried about the taxation of such benefits, then this content might give you an idea on what these Perquisites (benefits) are and how they are taxed in India.
Perquisite is actually a form of profit that an employee obtains from his/her employer apart from the salary or wages that he/she gains. As per the income tax department of India, this beneficial addition can be in the form of a cost free or reduced price accommodation provided by the employer, in the form of a service used or product purchased by the employee for which the employer pays the full amount or part amount, any equity or other form of security provided to the employee from the employer at a concessional price or free of cost.

There was a period when this benefit was taxed in the hands of employer in the name of ‘fringe benefit tax’. Now as ‘perquisite’, it taxed in the hands of the receiver who is the employee. The value of the benefit received as perquisite is considered to be a form of income and is added with the salary and taxed.
Categories and valuation of Perquisites for taxation:-
The valuation of each type of benefit is made as per the rules of income tax act. First the employer is categorized into one of the two categories. Further the taxation is made as per the rules in income tax act. One category contains a company or a firm, a local body, Association of Persons or Body of Individuals. Another category contains government companies, sole proprietor companies, Hindu Undivided Family etc.

Accommodation provided by government companies to employees irrespective of state or central government the tax is paid by the government organization which is the employer. For private firms the perquisite tax for this benefit is applicable as a percentage of salary based on the city where he/she is accommodated. There are certain exceptions for accommodation in mining areas, oil research areas and also in conditional transfer.

Facilities like sources of energy (gas, electricity) and water if provided or paid by the employer, the tax is charged in the hands of the employee based on the cost per unit of the facility.

The educational facility of the employee’s relative (son/daughter) if provided by the institution owned by the employer or where the expenses of education of the student is taken care of by the employer, the tax as perquisite is applicable in the hand of the employee. There is an exception in this case. If the expense for education does not exceed Rs 1000 per month in other schools in the same locality then this perquisite is tax exempt.

If an employee owns a vehicle (car) and uses it for both personal and official purposes, tax exemption is based on the cubic capacity of the car engine. A car whose engine is less than 1600 CC the amount of tax exemption is Rs 1200 per month and to those having over 1600 CC engine the amount exempt is Rs 1600 per month.
Fringe benefits taxed (FBT) in the hands of employer:-
  • 20% of the expenses on telephone or mobile provided to the employee for official purposes is considered as fringe benefit and is taxed in the hands of employer.
  • 50% of the expenses on health club facility provided to the employee fall under fringe benefit category.
  • 5% of the expenses on travel to foreign countries by the employee from the provided by the employer are considered to be fringe benefit.
The categories mentioned above just give an idea about how perquisites and fringe benefits are categorized. There are many more categories and areas of taxation for both FBT and perquisites. The valuation can change from time to time based on the changes made to tax laws.
Note: As of now FBT has been withdrawn and all perquisites are taxed in hands of employee after giving such slabs of exemption.

Company Fixed Deposits - India

Non banking financial companies in India:-
Apart from banks there are companies in India that accept money from general public for a fixed term and pay interest. These companies are authorized by the Reserve Bank of India to perform these tasks under specified regulations of RBI. However RBI does not guarantee on any sort of transactions or trades entered into with these institutions. In other words the institutions are not actually backed by the Reserve bank. There are set of guidelines and instructions from RBI to investors who are willing to invest in NBFCs. These instructions can help protect a person’s interest in investing in these companies.
Fixed deposit scheme is one of the schemes that are offered by NBFCs and there are specific permissions required to offer these schemes to public apart from regular authorization.
Features of company fixed deposit:-
Term: The term of company fixed deposits are usually less because when it comes to these deposit schemes the performance of the company and rating may change with time. So as a matter of insecurity shorter terms are preferred. The term as regulated by RBI cannot be less than 12 months or more than 5 years.

Types of company FD
: There are two types of fixed deposit schemes namely cumulative and non-cumulative fixed deposit schemes. Non Cumulative schemes as the name suggests pay off the interest earned on investment on regular basis (half yearly basis or annual basis) so the interest will not get acquired on principal to earn higher interest in the years to come. Cumulative fixed deposit scheme on the other hand where the interest accumulates with principal so as to earn higher returns when compared to non-cumulative plan. This scheme pays interest accrued on deposit schemes on maturity of the deposit.
Rating of a company: There are certain institutes (CRISIL, ICRA etc) that rate a company based on net owned fund (NOF) of the company. The companies are rated based on certain ceilings and slabs (ex: NOF more than 200 lakhs be rated in certain category) and based on the rating a person may decide whether he should invest or not in a company.
Interest rates: Interest rates on fixed deposit schemes offered by a company are higher than regular banks. This is one of the major reasons that people are interested in these schemes these days. The interest rate offered on the FDs is limited to a maximum of 12.5% by the Reserve bank of India and this figure can vary with time. A person has to stay updated about this information before depositing in these schemes. The interest rates available today in market range from 9% to about 12.25%. (coupon)
Pre-mature withdrawals: Premature withdrawals are permitted in these schemes and the lock in period of these schemes will be 3 months. Interest accrued and penalties are as per the terms and conditions of the company.
The person who is willing to deposit in company fixed deposits has to be conscious and updated about regulations of RBI and also current happenings in the industry. Here are few points that can help a person in this regard.
  • The company where the investment as deposit is made should be authorized by the Reserve Bank of India to accept money for fixed deposit schemes and the registration of permission for such schemes should be displayed in the offices of the company.
  • Rating of a company plays a major role while investing in fixed deposit schemes. This rating process renders the company’s worthiness for investment. Companies with lower rating in a financial span can also be denied permission to offer fixed deposit schemes. There are set of instructions wherein the company will have to inform the RBI about the financial crisis (if there are any) within certain duration and then stop accepting public deposits.
  • The interest rate provided on fixed deposits of companies is regulated by RBI.
  • The person who has issues related to receiving interest earned on deposits or principal can approach Company Law Board and launch a complaint in this regard. The board would direct the company and arrive at solutions to the problem faced.
Benefits of Company fixed deposit:-
There are few benefits of company fixed deposit that makes it preferable over other counterparts.
  • Interest rates in general are 2 to 3% higher than bank fixed deposits
  • On a short term they earn better income with good liquidity
  • The deposit scheme also has nomination facility
  • The application process and eligibility clauses are much simpler than those of regular bank fixed deposit scheme

Sunday, October 28, 2012

How to clear your name from CIBIL

If you have obtained a No Due certificate from your bank. This means you are no longer a defaulter. You need to inform your banker, enclosing a copy of the said certificate, and ask them to correct the CIBIL data. With regard to the processing of home loan application by another bank, you can explain the circumstances under which CIBIL data was not updated and that you have taken up the matter with a concerned bank. You can even show the No Due certificate as well as the letter written by you for correcting the data maintained by CIBIL.

How can a Credit Card improve your Credit Score

Ramesh is a Marketing Executive who has just started his career. He has read about the dangers of using credit cards and how they can lead him to overspend. Ramesh uses a debit card linked to his bank account and finds it a good alternative to a credit card. He gets a lot of offers for credit cards and is attracted by the convenience they offer. Does it help to have a credit history and will it add any value to his ability to manage his financial situation efficiently?

Ramesh must understand the role that a credit card can play in his financial life to be able to use it to his advantage. He can manage his cash flow by using a credit card to meet his regular expenses. He must also make sure that he pays his credit card bills fully each month in a cycle that is convenient.

Making payments for regular expenses through a credit card is a good way for Ramesh to keep track of his expenses. The credit card statement and the charge slips will give him the record to make sure he stays within his budget. Credit cards will also help him meet expenses in an emergency when he may run short of funds. Overdrawing on his bank account in such a situation by using a debit card will come at a cost.

There are some situations when using a credit card is more advantageous than a debit card. Making an online payment using a debit card carries a greater risk since an online fraud can clean out Ramesh' entire bank account. Similarly, an error in charging a purchase to a debit card could mean that the amount will be debited from his account immediately and take time to reverse, and he may fall short of funds during this time. In case of a credit card, he can appeal against the error and may not be required to pay.

Credit cards give him the facility of making a big purchase even if he does not have the funds immediately. He can also convert large purchases into EMI payments without attracting rolling credit charges, provided he makes the payments regularly.

A credit card is the easiest way for Ramesh to build a history of good credit behaviour, based on which his credit score will be assigned. A good score will help him access loans on attractive terms when he wants them. Since Ramesh is aware of the risks involved, he is very likely to use a credit card responsibly. He should, therefore, consider taking one and use it for the advantages and convenience it provides.

Saturday, October 27, 2012

Tax incentives on investments - Things to know

1) The tax incentives on investments are provided in the form of exemption for the amount invested, income earned and maturity amount. These incentives may be provided at any, none or all three stages of investment.

2) The EEE (exempt, exempt, exempt) taxation implies that the amount invested is exempt from tax in the year in which the investment is made. The returns and the amount redeemed are also exempt from tax. The PPF, ELSS and life insurance fall under this category.

3) Under the EET (exempt, exempt, tax) regime, the investment is only taxed at the withdrawal stage. NSC and pension policies are examples of EET investment as the amount put in is deductible from the total income and the income earned is exempt from tax.

4) If income in the form of interest or dividend is taxed, while the investment and maturity are exempt, the investment falls under the ETE (exempt, tax, exempt) regime. Tax-saving bank deposits and senior citizens savings schemes are such investments.

5) No exemption from tax is available for the amount invested under the TEE (tax, exempt, exempt) regime. The income earned from the investment and redemption, if the investment is held for a specified period, is tax-free. This is the case for equity shares and equity MFs.

ELSS See Net Ooutflows in FY 2012-2013

According to Association of Mutual Funds of India, tax saving schemes as a category has seen net outflows of Rs 934 crore in the half year ended September 30, 2012.

In all six months in the current financial year the funds have seen net outflows. Tax saving funds, technically known as equity linked saving schemes, have three year lock in for investments. Across 49 schemes, Rs 24635 crore worth of assets are under management in this category.

Over last three year ELSS as a category has given 4.94% returns. Compared to this PPF returns are better and risk free. As existing investors are logging out and new investors are not keen to invest, these funds have been experiencing net outflows.

However, market pundits are not as bearish on these funds. ELSS, as a tax saving option may not be available next year if direct tax code is implemented.

Many distributors are still recommending these funds to ride rising equity markets and to enjoy tax breaks simultaneously. Investments up to Rs 1 lakh per financial year in these tax saving mutual fund schemes fetch tax break for investors.

Friday, October 26, 2012

CBDT Panel on Accounting Standards recommends no books be maintained in case of no taxable income

THE CBDT Panel on Accounting Standards has submitted its final report to the Board. This committee was constituted comprising of departmental officers and professionals in December, 2010 to inter alia suggest AS for the purposes of notification under section 145 (2) of the Act. The Committee submitted its first Interim Report in August 2011. A discussion paper containing the main recommendations of the Committee was issued in October, 2011 for inviting comments/suggestions from all stakeholders.
Section 145 (1) of the Income-tax Act, 1961 (‘the Act') provides that the income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” shall [subject to the provisions of sub-section (2)] be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Section 145 (2) provides that the Central Government may notify Accounting Standards (‘AS') for any class of assessees or for any class of income.
In its final report, the Panel has recommended that the AS notified under the Act should be made applicable only to the computation of taxable income and a taxpayer would not be required to maintain books of account on the basis of AS notified under the Act. The Committee examined all the 31 AS issued by the ICAI and recommended notification of AS on 14 issues under the Act and formulated drafts of AS on these issues. The Committee has termed them as “Tax Accounting Standards” (TAS) to distinguish from the AS issued by the ICAI/notified under the Companies Act, 1956.
The comments and suggestions on the final report may be submitted by 26th November, 2012 at the email addresses (dirtpl3@nic.in or rkbhoot@gmail.com).